Archive for March 25th, 2012

Looking through the written answers last Thursday in the Dail, we get what seems on here to be one of the clearest insights into the operation of NAMA. We learn:

(1) For all the bluster about NAMA’s billions of sales, the Agency had only booked €2.7bn to the end of September 2011

(2) Shockingly NAMA has made a profit of only €132m on these sales, and remember these sales were supposed to be of better quality assets in markets where prices had improved after November 2009

(3) We learn that although NAMA is prevented from selling property to defaulting developers, NAMA is allowed to sell property to its Qualified Investment Funds which can then sell that property to anyone, including defaulting developers.

(4) NAMA has not yet had EU approval on the acquisition of 2/3rds of its loans

(5) The Government is still claiming that any eventual NAMA losses will be recharged to the banks, pro-rataed to the original par value of loans acquired from those banks. So Anglo and INBS will be recharged 50% of any NAMA loss.

(6) Finally, FINALLY we have confirmation that NAMA does NOT have any debt reduction target by the end of 2013 enshrined in any Troika agreement. There are commitments for asset disposals, operational costs and governance but NOTHING about redeeming NAMA’s bonds

(7) NAMA is funding a GBP 20,000 (€24,000) piece of research on landbank and development issues inNorthern Irelandwith theUniversityofUlster

(8) NAMA hasn’t even made provision for what the media estimate will be €7m of legal costs relating to the Paddy McKillen court challenge which Paddy substantially won at the Supreme Court in early 2011

(9) NAMA has approved overheads of an average of €1.3m per developer or €55m for 41 developers. So much for NAMA and its €70-100,000 or €200,000 salaries.


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On Thursday last in the Dail, the Minister for Finance, Michael Noonan replied to a question from Sinn Fein’s finance spokesperson Pearse Doherty about what is beginning to look like a very controversial accounting method. The Sinn Fein finance spokesperson was again probing the methodology used by NAMA to account for the interest it shows as income in its accounts, in other words, the amounts developers are paying in interest on loans now owed to NAMA. I recommend you study the question and answer because given the state and outlook for Irish property, NAMA looks to be producing financial information which is deeply misleading and may well be hiding losses which will only become apparent in years to come.

At this point, I know from experience some of you will switch off but this is a very important issue. NAMA is showing €786m of interest income in its accounts for the first nine months of 2011, but in fact it has received only €537m in cash which is €249m less.

If you were NAMA and you had a €100 loan given to a developer, then you would expect to collect perhaps €3 or €4 per annum in interest, and you would expect that in cash. Obviously many of the loans in NAMA are underwater and are not performing, so in some cases you might get zero and in others you might only get part-payment of the sum due, maybe €1. That would be “cash accounting” and most people don’t need an accounting qualification to grasp this. But NAMA is not using “cash accounting”, it is using something called the “Effective Interest Rate” method to calculate the interest income it shows in its accounts.

The “Effective Interest Method” means that you estimate what the developer will receive for his property when it is disposed of. So the developer might owe you €100 and is supposed to be paying you €4 per year in interest but he isn’t because he doesn’t have any cash, but if you estimate the developer will sell his property for €104 in two years, then the “Effective Interest Rate” will allow you to show €2 as interest income this year and €2 next year because you will then receive €104 from the sale and after deducting the principal, you will have €4 to apply against the interest due from the previous two years. But how do you estimate the future value of the property? Minister Noonan answered that question when he said “NAMA determined the effective interest rate for the loans it acquired using this collateral based valuation model which projects the property related cash flows and the realisation of the property collateral. The model assumes the realisation of the property using its value at the end of November 2009, as adjusted to reflect its long-term economic value where appropriate.”

Now we know that Irish residential and commercial property has declined by 20-30% since November 2009, and we also know that NAMA paid approximately 9% over the market value of property in November 2009 as a premium which came to be known as Long Term Economic Value. The Long Term Economic Value regulation prevented NAMA from examining any data after 10th January 2010 so NAMA paid way over the odds for its loans – we know that, that’s not new but what is new is that NAMA is calculating its interest income on the assumption that it will realise what it paid in November 2009.

In other words, if NAMA is calculating its effective rate by reference to values at the end of November 2009 as adjusted by its long term economic value at that date, then we can categorically state that NAMA is overestimating and misrepresenting its interest income in its accounts. The NAMA CEO last week told a London audience that the Agency expected to announce a profit before impairment of €750m in 2011. That will be based on the Effective Interest Rate methodology – on a cash interest basis, the figure will be considerably less than €500m, and remember that is before the 2011 impairment charge which is estimated on here to be in the ballpark of €1bn. It is now high time for NAMA to come clean about the methodology it is using to show interest income in its accounts. Fianna Fail’s Sean Fleming has promised NAMA a “show-down” on the issue at the Committee of Public Accounts, and it is not acceptable that NAMA produce fantasy income figures based on valuations from two years ago which was a time when the knife was still falling.

It is like pulling teeth to get a drip-drip of snippets from NAMA as to how it calculates the income shown in its accounts. Sean Fleming has robustly criticised the information provided by NAMA, and Pearse Doherty has been doggedly pursuing this issue. Where is the Banking Expert Peter Mathews when you need his experience as a banker and his in-depth knowledge of how NAMA acquired the loans, and how “Effective Interest Rate” calculations work? Below is the worked example of how the “Effective Interest Rate” works as communicated by Brendan McDonagh to Committee of Public Accounts – the letter itself which contains the worked example is here:


We now know that the €120 above shown as the cash value in 2015 is the NAMA value at 30th November 2009 plus long term economic value. And if this loan is for an Irish property we know that the present value is about €80 (€120 less €10 for long term economic value less €30 for declines since November 2009). So NAMA needs a 50% uplift in values by 2015 in order that its Effective Interest Rate methodology is proven to be valid.

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